California Marijuana Tax Revenue is Lower than Expected. What Now?

Even though the state of California did not legalize retail marijuana until 2018, they are one of the leading activist states in pushing for the legalization of cannabis. Due to their long wait for legalization, California has the most established black markets in the nation. From Humboldt County to the San Fernando Valley, California is the home to many first-class marijuana strains. The popularity of Cali grown cannabis is there, but it has been a thriving black market until now.

State legalization of recreational marijuana was a huge step forward for California, yet, the legal market is not meeting expectations. Enforcement of laws and regulations is slim, prices and taxes are staying high, and California’s marijuana tax revenue is not impressing the state. California’s legal cannabis market is in dire need of reform to smooth out the kinks of this transition.

A Quick Glance into California’s Cannabis Industry

Before legalization of cannabis began to take hold across the nation, California was the face of marijuana. It was the first state to legalize medical marijuana under Proposition 215 back in 1996. While the state’s medical marijuana market is doing just fine, the recreational market can not compete with the black market for many reasons. Think about it, California was the home of many primary cannabis activists, and it took them nearly 22 years to recreationally pass marijuana. This shows just how disconnected the state industry is from their consumers.

The state of California has some of the best cannabis cultivators around, and their names will never be known. One thing that California shops, like The Green Door, understand is that quality cannabis matters to the consumer. Fast forward to 2018, where recreational marijuana is now a reality, and Californians are choosing their home-grown supplier over any legal cannabis shops. Why is this the case? Consumers do not see the point in taking the time to go to a dispensary, get the same (if not worse) quality marijuana, and pay nearly double what they would from their buddy. The primary root of these growing pains is the state's crazy marijuana taxes.

California’s Marijuana Tax

California is known for being an expensive place to live in all aspects of life; including marijuana. When the recreational cannabis market started in California, the state was expecting colossal tax revenue. Instead, California is not even hitting half of their goal. Initially, the state predicted raking in around $175 million in marijuana taxes. Between January 1 and March 30th of this year, California generated only $34 million in cannabis taxes. This number may seem reasonable for an up and coming industry, but it is bringing some serious issues to light.

At the moment, California has a state marijuana tax of 15%. Keep in mind; this does not include the additional local marijuana taxes. Certain municipalities charge as high as 9.2% sales tax on top of the 15% of the state tax. These numbers are astonishing compared to many other legal states. With such high tax rates, how is it possible for the tax revenue collected to be such a low number? Out-the-door prices of retail marijuana are not worth it for the average consumer. Even though the taxes are high, the overall sales need to increase for the tax revenue to rise. California is in need of some serious changes to build their recreational marijuana industry to where the state would like it to be.

A Closer Look

The amount of cultivation licenses is massive compared to the amount of legal retail shops. These numbers create a plentiful supply of product without a platform to distribute in a timely manner. In turn, cultivars and manufacturers are losing money. These cannabis companies can’t move their product at the margins they need to, and the taxes imposed on the industry make it impossible to cut costs. California needs to focus on ramping up their cannabis sales and not on the immediate tax revenue. The industry and state must come together to lower their prices of weed without killing all competition and quality of the product.

Number of Licenses:

Amount of Applications – 1,800

Retail Licenses Approved – 400

Cultivation Licenses Approved – 3,535 licenses

Leading Causes of Low Tax Revenue

California has not found a way to balance this transition from prohibition to legalization. Once it does, California's marijuana market should begin to balance itself out. If changes are not made, the industry is going to suffer on all angles. The competition will dwindle, those with capital will outlive the race to the bottom, and Californians will continue to buy home-grown cannabis; in turn, keeping the state’s tax revenue low.

Two Main Causes:

1) A primary cause of low tax revenue is simply not selling enough product. The state has approved more cultivation licenses than it needs to fill its dispensaries. That’s not to mention all the non-licensed grows filtering their cannabis into the market as well. Now California is stuck with a ton of product that is diminishing in quality every day. Not only is it tough to sell through all the excess product, but it is not meeting the quality standards of California’s knowledgeable consumers. Due to the high tax rates in place for 2018, these consumers are having to pay crazy out-the-door prices for low-quality cannabis.

2) The state of California lacks in overall compliance and regulation for their statewide cannabis industry. The Bureau of Cannabis oversees the entire industry, but a lot of marijuana laws are left up to the municipalities. Some cities allow retail sales and others do not. That said, actual legal recreational dispensaries are hard to find. Most of the retail licenses were allotted to existing medical marijuana shops. Between random local laws and a small number of legal recreational shops, the state is missing out on a lot of the available market. By missing out on a big portion of the state’s market, the overall tax revenue is bound to be low.

California Marijuana Tax Soultions

California is going to need to take action by enforcing laws and regulations to create a compliant industry that provides an even playing field for all competition to thrive. The state is already looking to reform the cannabis tax for next year, but it needs to be paired with an all-around industry reform.

Two Main Solutions:

1) California’s budget year ends on June 30th. State representatives such as Tom Lackey and Rob Bonta, are pushing for cannabis tax reform. They believe that for California’s cannabis industry to balance out, the taxes must be lowered. The proposed decrease would drop the state marijuana tax down to 11 percent from the whopping 15 percent already in place. Supporters of the tax decrease understand that this will make it more difficult for the state to generate higher tax revenue quickly; however, they also see that this industry desperately needs a tax cut to get it through this transition successfully.

2) While tax reform is the central piece in allowing this industry to thrive, it is not the sole solution. Tax reform and compliance regulations go hand-in-hand. Yes, consumers care about the price but if the quality of California’s legal marijuana does not change, consumers will continue to shop elsewhere. Stronger compliance and overall regulation is necessary for creating a smooth flowing industry in all parts of the state. With such scattered local laws and taxes, it makes it tough for companies to tap into the entire state’s market. There are not enough legal retail dispensaries to tailor to local consumers and the quality of product isn’t worth all the work.

Justice Council is a freelance writer, CBD specialist, and cannabis enthusiast located in Denver, Colorado. His wide range of experience as a budtender, delivery driver, and CBD sales rep has given him a unique look into this new world of cannabis. Throughout his career in the industry, Justice has written many pieces on culture, economics, product knowledge, and career opportunities within the cannabis space. He takes pride in being part of a truly pioneering industry.

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